Analysts Largely Sidelined On Twitter As Platform Gears For Higher Investments

Twitter Inc TWTR shares came under pressure Thursday after the company issued disappointing guidance.

The Analysts

• Morgan Stanley analyst Brian Nowak maintained an Equal-weight rating on Twitter shares and reduced the price target from $33 to $31.
• KeyBanc Capital Markets analyst Andy Hargreaves maintained a Sector Weight rating on Twitter shares.
• Wedbush analyst Michael Pachter maintained a Neutral rating and $37 price target. 
• MKM Partners analyst Rob Sanderson maintained a Buy rating and $43 price target.
• Raymond James' Aaron Kessler maintained a Market Perform rating.

Morgan Stanley: 2019 An Investment Year

Twitter's weaker-than-expected Q1 GAAP profit guidance and 2019 opex commentary suggest 2019 is likely to be an investment year as the social media platform company to improve the health, user experience and monetization potential of the platform, Morgan Stanley's Nowak said in a Friday note.

The analyst sees Twitter investing around health and safety, user experience and developing a more conversational product offering, ad product and underlying tech platform.

Many of these investments have a long-term payoff and may not necessarily directly lead to faster long-term revenue growth, pressuring earnings and the stock in the process, Nowak said. 

" ... And these investments combined with the standard (and necessary) platform investments and TWTR's smaller user base and gross profit scale limits its ability to invest and deliver revisions." 

Morgan Stanley maintained its 2019 EBITDA estimates largely unchanged but lowered its 2020 EBITDA estimates by 3 percent.

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KeyBanc: Twitter Entering Period Of Revenue Deceleration, Margin Compression

Twitter's ad revenues of $909 million exceeded expectations, helped by 23-percent year-over-year growth in advertising, and its EBITDA also beat estimates due to revenue upside and opex leverage, said KeyBanc's Hargreaves.

Monetizable Daily Active Users, or mDAUs — which the company reported for the first time — rose 10 percent year-over-year to 126 million, while monthly active users fell 3 percent, the analyst said. 

Hargreaves expects platform investments to drive margin compression in 2019.

"Twitter is likely entering a period of revenue deceleration and margin compression after the rebound in 2018, which seems likely to limit multiple expansion from current levels." 

Wedbush: Twitter's Valuation Discount Appropriate

Twitter's Q4 upside was driven by broad-based strength and video ad momentum, Wedbush's Pachter said.

The analyst sees the divergence of user growth between MAUs and DAUs as a corollary of ongoing platform challenges. The decline in MAU was due to product changes limiting email notifications, the impact of health initiatives and foregoing paid SMS carrier relationships in certain territories and, to a lesser extent, GDPR in Europe, the analyst said. 

The updated guidance suggests a deceleration in revenue growth amid a tougher comparison and the possibility of margin volatility, Pachter said. Twitter appears to be making progress toward sustainable revenue growth, he said. 

In Wedbush's view, Twitter's discounted valuation relative to peer companies is appropriate, given the uncertainty over user growth and relatively unimpressive mDAU levels.

MKM Partners: We Would Buy On Weakness

The expense outlook calling for 20-percent growth in 2019, a solid increase from 13-percent growth in Q4, as well as the newly disclosed DAU numbers, were the sore points of Twitter's Q4 report, MKM Partners' Sanderson said.

This is a reset in expectations and is not suggestive of any change to strong and improving underlying fundamentals, the analyst said. 

Twitter's monetization continued to improve, Sanderson said, adding that this translates to upside optionality if Twitter can finally crack the mass market.

"We would be buyers of weakness," he said. 

Raymond James: Shares Are Fairly Valued

Advertising fundamentals are improving, but slower user growth as well as lower-than-expected DAUs are a concern, Raymond James' Kessler said.

The analyst expects higher 2019 expense growth to weigh on EBITDA growth, which is expected to come in at 7 percent in this year vs. 40 percent in 2018.

"We believe shares are fairly valued at 13x 2020E EBITDA given our outlook for mid-teens long-term revenue growth." 

The Price Action

Twitter shares were down 3.17 percent at $29.82 at the time of publication Friday. 

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